You are engaged to audit the December 31, 2020, financial statements of Justin Company, a manufacturer of household appliances. Your audit disclosed the following situations: In June 2020, the company began producing and selling a new line of dishwasher. By the end of the year, it had sold 120,000 to various dealers for P15,000 each. The product was sold under a 1-year warranty, and the company estimates the warranty costs to be P750 per dishwasher. Justin had paid out P30 million in warranty expenses as of December 31, 2020, which is also the amount shown as warranty expense in its income statement for the current year. In response to your letter audit, Justin’s lawyer informed you that the company is involved in a lawsuit for violating environmental laws regulating hazardous waste. Although the litigation is pending, Justin’s lawyer is certain that Justin will most probably have to pay cleanup cost Justin is the defendant in a patent infringement suit by Bever over Justin’s use of a hydraulic compressor in several of its manufactured appliances. Justin’s lawyer informed you that if the suit goes against your audit client, the loss may be as much as P10 million. However, the lawyer believes that the loss of this suit is only possible. Justin did not in any way disclose this pending litigation in its financial statements. QUESTIONS: What amount of warranty expense should be shown on Justin’s income statement for the year ended December 31, 2020? What amount of warranty liability should be shown on Justin’s balance sheet as of December 31, 2020? What amount of lawsuit liability should be reported as a provision on Justin’s December 31, 2020, balance sheet?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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You are engaged to audit the December 31, 2020, financial statements of Justin Company, a manufacturer of household appliances. Your audit disclosed the following situations:

In June 2020, the company began producing and selling a new line of dishwasher. By the end of the year, it had sold 120,000 to various dealers for P15,000 each. The product was sold under a 1-year warranty, and the company estimates the warranty costs to be P750 per dishwasher. Justin had paid out P30 million in warranty expenses as of December 31, 2020, which is also the amount shown as warranty expense in its income statement for the current year.

In response to your letter audit, Justin’s lawyer informed you that the company is involved in a lawsuit for violating environmental laws regulating hazardous waste. Although the litigation is pending, Justin’s lawyer is certain that Justin will most probably have to pay cleanup cost


Justin is the defendant in a patent infringement suit by Bever over Justin’s use of a hydraulic compressor in several of its manufactured appliances. Justin’s lawyer informed you that if the suit goes against your audit client, the loss may be as much as P10 million. However, the lawyer believes that the loss of this suit is only possible. Justin did not in any way disclose this pending litigation in its financial statements.

QUESTIONS:

What amount of warranty expense should be shown on Justin’s income statement for the year ended December 31, 2020?

What amount of warranty liability should be shown on Justin’s balance sheet as of December 31, 2020?

What amount of lawsuit liability should be reported as a provision on Justin’s December 31, 2020, balance sheet?

 

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